The European Commission proposed on Tuesday to loosen the EU’s overly strict securitisation rules for banks, in a bid to boost the underdeveloped securitisation market and free up capital for lending while still safeguarding financial stability.
It is the first Commission proposal under a new push by the EU executive arm to better integrate the 27-nation bloc’s capital markets to provide more sources of financing for companies to better compete with China and the United States.
The proposal does not, however, address the problem of Europe’s debt bias in corporate financing, an issue especially for small enterprises — a vast majority of EU firms — which often do not have sufficient collateral to secure a bank loan.
The Commission has said it would present ideas to increase equity financing, seen as more stable and beneficial, later.
The Commission proposal, which will have to be agreed among EU governments and the European Parliament before it enters into force, seeks to roll back some of the sharp tightening of securitisation rules in the wake of the sub-prime mortgage crisis in the United States after 2007.
“This was the root cause of the great financial crisis, but we should not confuse the instrument with its misuse,” EU Financial Services Commissioner Maria Albuquerque said.
“We have revised the securitisation framework which entered into force in 2019, and which was focused on making sure that there were no risks,” she said, adding too much focus on risk avoidance stifled the whole market.
“Risk is like everything else — if you take risk to zero, you kill all activity. So now we are trying to find a better balance between risk and the positive outcome that should come from the use of this instrument,” she said.
FREE UP BANK CAPITAL
Securitisation means that banks can package loans to companies or households and sell them to investors, like insurance companies or asset managers, as securities.
This lets banks transfer the risk associated with the loans to the investors and use the bank capital they had to set aside to cover that risk, to make new loans.
But the Commission did not have any estimates of how much bank capital the relaxed rules could free up or how lending might increase as a result. “It is impossible to predict,” one Commision official said.
The Commission said there was room for the securitisation market to grow because in the U.S. it was around $14 trillion while in the EU only 1.6 trillion euros ($1.85 trillion), still below the peak of 2 trillion euros from 2008, when the U.S. sub-prime crisis hit Europe.
“We’ve all learned the lesson, so the framework is more robust now,” Albuquerque said. “We are still making sure that this is managed properly, hence the capital requirements and the floors that we are putting in place. We are lowering them, but we’re not taking them off,” she said.
Among the proposed changes, investors would no longer need to double-check from their side if the bank issuing the security fulfilled all the necessary requirements. Due diligence would also be more proportionate to the level of risk.
There would also be less paperwork, fewer details required to be disclosed and a lighter transparency regime for private deals compared to transactions with public entities.
“This isn’t about returning to practices that led to financial turbulence,” Albuquerque said. “Financial stability can never be endangered, but we think there is room to manage this better, increase the capacity and the efficiency of banks to lend to the economy and still preserve financial stability.”
($1 = 0.8642 euros)
(Reporting by Jan Strupczewski)
